Canada: Fully Secured @ Gowlings - March 31, 2011

Last Updated: April 6 2011

Edited by Richard Dusome

A Banker Asked Us: ILA Certificates for Personal Guarantees from Officers and Directors of the Borrower

By: Richard Dusome (Toronto)

Q: My security package includes a personal guarantee from the president of the corporate borrower.  Do I need a certificate of independent legal advice (ILA) when an officer or director provides a personal guarantee?

A: It seems there is no end to the potential defences that will be raised by guarantors seeking to avoid liability under their guarantees.  Fortunately, the Ontario Superior Court of Justice has recently confirmed in Bank of Nova Scotia v. Antech Electric Ltd. that an officer or director of a corporate borrower providing a personal guarantee of the borrower's indebtedness does not need to receive ILA in the absence of very special circumstances.  The Court quashed an officer and director's attempt to escape liability on his personal guarantee on the grounds that he did not receive ILA, and that he did not read, review or appreciate the nature of the documents he signed and his obligations under these documents.  The Court concluded on a motion for summary judgment that unless there was some evidence of undue influence, fraud or misrepresentation made to the officer and director prior to signing the guarantee, the guarantee would stand.

In Antech, the personal guarantor was the principal officer of the corporate borrower and directly involved in the loan negotiations and arrangements.  If however the officer or director providing the personal guarantee is the spouse of the principal officer or another family member related to the principal officer, the usual rules will apply and lenders are advised to ensure such officers and directors receive ILA as their "status" as an officer and director may be misleading.  Lenders should also be wary of putting themselves into situations like those described in Lisa MacDonnell's article below where the principal officer might allege his or her guarantee is not enforceable on the separate grounds of economic duress.  Similarly, if the officer or director providing the personal guarantee is a minority shareholder of the Borrower not directly involved in the loan negotiations or arrangements, an ILA certificate may be advisable.

We would be happy to assist you in assessing whether an ILA certificate is advisable for a particular loan transaction.

Perfecting Security on Intellectual Property

By: Michelle Easton (Ottawa)

In Canada, it is common for lenders to take security over patents, trade-marks and copyright, as well as other types of intellectual property. The taking of security over intellectual property is regulated by provincial law. Accordingly, parties taking security over intellectual property must ensure that they comply with applicable provincial legislation in order to create valid and enforceable security interests. 

In all common law provinces, a security interest is created pursuant to a security agreement. The security agreement should list or otherwise identify in sufficient detail (including reference to registration numbers and serial numbers where applicable) the intellectual property against which the security is granted.  Security interests are perfected by the registration of a financing statement in the province in which the debtor is located at the time the security interest attaches. If the debtor resides outside Canada, perfection of the security interest is governed by the foreign jurisdiction where the debtor resides. In Quebec, security is provided by way of a hypothec registered in the register of personal and movable rights.

It is also prudent (and highly recommended) to provide public notice of the security interest by recording the security interest against the intellectual property in the Canadian Intellectual Property Office ("CIPO"). Due diligence investigations frequently arise in a number of different contexts involving intellectual property where searches at CIPO will be conducted in order to help verify ownership and status of the rights. One note of caution with respect to searches at CIPO, there may be a backlog of several months before filed documents affecting title appear on the Register. Further, there is no mechanism to record security interests against certain types of intellectual property such as unregistered common law trade-marks, trade names and domain names.  Recordal of a security interest in CIPO against patent, copyright or trade-mark applications or registrations can be effected by filing a copy of the security agreement which clearly identifies the property against which the security is granted and payment of the prescribed fee.

Often a secured party will require the debtor to include executed assignments of the intellectual property in a form that is registrable or suitable for recordal in CIPO, to be held in trust pending the secured party enforcing its security and disposing of the property of the debtor. If assignments are granted by the debtor, it is particularly important that the assignment of any trade-marks be held in a trust pursuant to which the assignment will not become effective unless and until the security is enforced. If the debtor retains control over use of a trade-mark and not its ownership, the distinctiveness of the mark may be adversely affected. For this reason, parties may prefer to avoid an assignment of a trade-mark and instead include a power of attorney in the security agreement which permits the secured party, upon an event of default occurring and the secured party enforcing its rights under the security agreement, to execute an assignment on the debtor's behalf.

"Hell or High Water" Clauses in Equipment Leases: Their Enforceability in Quebec

By: David Kierans (Montréal)

Equipment lessors usually see themselves as providing financing to their customers.  For this reason, lease contracts generally include obligations that the lessee must satisfy even where the leased equipment does not operate as expected or is lost, damaged or destroyed.  Commonly called "hell or high water" clauses, these contractual provisions essentially require that the lessee perform its obligations under the lease without any right of set-off, deduction, abatement, compensation or counter-claim for any reason whatsoever.  For the lessor, the purpose of this clause is to ensure that it will invariably receive its monthly rental payment.  Accordingly, the enforceability of these clauses in law are very important to a lessor.

The enforceability of "hell or high water" clauses in equipment leases governed by Québec law will depend on whether the lease is considered to be a "contract of lease" ("contrat de louage") or a "contract of leasing" ("contrat de crédit-bail").  While this terminology may appear confusing to those outside of Québec, the distinction is critical to how the Québec courts will treat a "hell or high water" clause in a commercial lease contract.

For the full article, click here.

British Columbia: Top Line Survives: Lenders Financing Landlords or Tenants Beware

By: Don Weaver (Vancouver)

In 1996, the BC Court of Appeal held in International Paper Industries Ltd. v. Top Line Industries Inc.,  that unless the requirements of the BC Land Title Act respecting the subdivision of land are complied with (including subdivision plan approval and registration) a lease of a portion of a parcel of land for a term of greater than 3 years (other than the lease of a building or part of a building) was invalid.  In addition, the Court held that such an invalid lease could not create contractual rights and obligations between the landlord and tenant.  As a result, a lease of   unsubdivided land is invalid and unenforceable between the parties. 

This decision caused significant concern for lenders advancing credit to landlords on the strength of assignments of rents or to tenants on the strength of mortgages of leases, as the validity of such security depends on the validity of the underlying leases.

In May of 2007,  the BC Land Title Act was amended to provide by section 73.1 that a lease of a part of a parcel of land is not unenforceable between the parties to the lease by reason only that the lease does not comply with the requirements of Part 7 of the BC Land Title Act or that an application to register the lease may be refused or rejected.

With this amendment it was assumed incorrectly that Top Line was history and that a  lease of an unsubdivided parcel of land for a term of greater than 3 years was now valid. However, the recent October, 2010 decision of the BC Court of Appeal in Idle-O Apartments Inc. v. Charlyn Investments Ltd. confirms that this is not true for leases entered into before section 73.1 came into effect on May 31 2007, as the amendment to the BC Land Title Act was held not to have retrospective effect.

Lenders must therefore continue to be vigilant in examining leases of BC lands entered into by their landlord and tenant customers before May 31, 2007 in order to assess their validity and hence their value (and that of the rents payable thereunder) as security.

Economic Duress Recognized as a Possible Defence to Contract Enforcement

By: Lisa MacDonnell (Toronto)

Another loan enforcement hurdle has emerged through the recognition by the Newfoundland Court of Appeal in Burin Peninsula Community Business Development Corporation v. Grandy of economic duress as a possible defence to realization upon a guarantee. The Lender was a lender of last resort and was financing the payout of the corporate debtor's indebtedness to its existing lender who was making demand for repayment. Shortly before closing, the Lender introduced a last-minute requirement for the delivery of personal guarantees from the president of the corporate debtor and his spouse in respect of a corporate loan. The original loan commitment did not make reference to the need for delivery of  personal guarantees, and consequently the last-minute inclusion of personal guarantees as a condition for advancing the loan represented a contractual modification to a binding loan commitment.

The Court recognized that ordinary business pressures will not constitute economic duress. However, the Court found there was a strong element of coercion in the suggestion by the Lender's representative that the corporate debtor's request for a waiver of the requirement for the delivery of personal guarantees was unlikely to be approved by the Lender's Board of Directors, and that the loan would therefore likely be declined. The Court focussed on the fact that the corporate debtor and personal guarantors protested the last-minute requirement of delivery of personal guarantees and did not realize that there was a binding loan commitment on the Lender to advance the funds without the delivery of personal guarantees. The personal guarantors had not received independent legal advice (ILA), and the court noted that the absence of ILA can be a relevant factor in cases of economic duress, particularly in situations involving variations of existing contracts. The Court concluded that the inclusion of personal guarantees represented a contractual modification to the loan commitment for which no consideration was given. Unfortunately, the Court ignored the fact that personal guarantees had been given to the existing lender and that these guarantees were about to be demanded upon if the existing loan was not refinanced.

The facts were very compelling in Burin and it is not clear how the Court's decision would be applied in situations where there is not a clear omission in the loan commitment with respect to deliveries required on closing. Further, the Court did not provide any guidance in assessing what new consideration a lender must provide in those situations in order to require delivery of additional documents.

In light of the Court's ruling in Burin, lenders should be cautious when introducing contractual modifications to loan commitments and required deliveries on closing, especially in situations where the corporate debtor is not represented by counsel and has not been provided with adequate time to assess and/or contest the new delivery requirement. 

Spotlight on Security Documents: The Amalgamation Confirmation of Security Agreement

By: Richard Dusome (Toronto)

The amalgamation of a corporate borrower with other corporations is a fairly common occurrence in today's marketplace whether arising as part of a tax planning strategy or due to the cost cutting streamlining of a corporation organization structure.

Many corporate statutes like the OBCA contain provisions which generally state that the amalgamated corporation possesses all of the property, and is subject to all of the liabilities, of each of the amalgamating corporations.  However having the newly amalgamated borrower provide an amalgamation confirmation of security agreement (ACSA) is a prudent and low condition a lender can require be satisfied as part of giving its consent to an amalgamation.

The ACSA can serve as a useful tool to synchronize or clarify defined terms like "Secured Obligations", "Borrower" and "Debtor" to ensure that all security documents granted by the borrower under any of its predecessors names at any time in the past stand as continuing collateral security for the repayment of all present and future indebtedness to the lender, whether incurred by one of the pre-amalgamating corporations or by the post-amalgamation entity.  The ACSA can also easily give effect to one or more amendments to the underlying credit agreement or security documents needed to reflect changed circumstances since the time the applicable document was delivered.   Finally, the ACSA can also serve as a consolidated checklist of the components of a lender's security package accumulated over several years of amended facility letters and credits, and provide for a rationalization of duplicate security documents and security registrations where for example, a borrower and a guarantor amalgamate. This may facilitate the making of PPSA and other security amendments needed to reflect any name change of the borrower or guarantor arising from the amalgamation. 

Some security documents now contain an amalgamations clause that briefly addresses some of the same issues as are included in the ACSA.   When security documents do not contain such a clause, the ACSA is a quick and effective tool for maintaining a large or diverse security package.  We would be happy to assist you with this document.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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